The certification of agricultural products is being increasingly discussed in contemporary agribusiness in Brazil and worldwide. There are still many uncertainties regarding the value added, considering the relatively high costs and efforts of implementing a certification of international credibility. This contribution aims to discuss the costs and benefits of certification by investigating the cases of coffee and soybeans certification in Brazil, one of the leading agricultural markets worldwide.
A considerable added value is achieved during the (initial) implementation of a typical socio-environmental crop certification, since due to improved agricultural practices, the productivity and quality of the agricultural product increases. Besides these benefits, there is an economic gain, which can be calculated by the formula below. This gain usually decides whether a farmer adopts a crop certification.
AV = (iQ x iP + rCP) - CI
AV = Added Value
iQ = increased sales quantity (e.g. metric tons)
iP = increased sales price
rCP = reduced costs of production
CI = implementation costs of certification
The sales quantity of the agricultural product (Q) should increase due to a higher demand of consumers for certified products, and certifying bodies talk about a 10-20% reduction of production costs (rCP). By implementing farm management processes, the production process becomes more efficient and machinery failure or human errors are avoided. Nevertheless, what convinces the producer is the immediate gain, the price premium (iP). To substantiate the analysis at this stage, two main Brazilian crops shall be investigated: coffee - an example of a crop in which certificates have been used for several years in Brazil - and soybean - an example of a crop in which certifications entered Brazilian agriculture only five years ago. On this basis a forecast can be attempted for the future costs and benefits of agricultural certification.
In addition to industry-specific protocols (e.g. of Illy or Nespresso), the certifications most widespread in coffee in Brazil are the socio-environmental certifications UtzKapeh, Rainforest Alliance and Fairtrade which has a social focus. The amount of certified coffee in Brazil is still low, but certification is required for the majority of exported coffee. The price premium of certifications is measured in value per bag on the NYSE, where coffee is traded as commodity. Today, premiums are between 2.5% for certified coffee with UtzKapeh and 6% for Fairtrade coffee. However, when the certification UtzKapeh entered the Brazilian market in 2002, the premium paid by buyers was around 10% of the value per bag. It seems that today UtzKapeh has become a standard for many buyers, who demand this certification of their suppliers. The premium decreased from 10% to 2.5% and the producers began to see the UtzKapeh (like other certifications) as a market barrier. In soybeans, the share is still low and certifying bodies worldwide have only begun to develop standards relevant to soybean, primarily due to demand from European industries. An example of a socio-environmental certification (for not genetically modified soybean) is Pro-Terra. The premium per ton for Pro-Terra certified soybeans today is around $ 16 (or 3%). In relation to the implantation costs (CI), they vary depending on the situation on the farm. Considering the adjustments necessary to follow the standards of a standard socio-environmental certification like UtzKapeh, a Brazilian farmer spends on average $ 5,500, besides the cost of consultants which are around $ 1,500. With a premium of $ 10 per bag, a gain is possible starting from a production of 700 bags, which means (with an average yield of 20 bags per ha) 35 acres - which would be a small farm. In soybeans, with a prize of $ 16 per ton from a production of 438 tons, or (with an average yield of 3 t per ha) 146 hectares - which would also be a small to medium farm in Brazil. Thus it seems then that even small to medium farms can recover the costs of certification in the first year, and large farms would be able to recuperate these initial costs even sooner.
The certification has to be seen as another marketing tool for modern agribusiness. The history of existing certifications in Brazil shows that after a few years it seems to become a standard in the market, to which it was introduced. Initially, the producer and also the seller of certified agricultural products have a differential advantage. This comes with immediate financial benefits, which outweigh implementation costs. Over time and with an increasing offer of certified producers, certification becomes a tool of market access and loses the initial differential and financial advantage. The remaining benefits are increased productivity and quality, access to the target market (sales amount) and the reduction of production costs. Either way it can be concluded that certification does add value to the agricultural product and therefore is a tool that every business in the agri-food chain, not only in Brazil, should consider for improving its results.
Franziska Bendisch holds a PhD in Marketing and is responsible for Sustainable Development and Food Chain partnerships in Latin America for a leading Agrochemical company. She can be contacted via fbendisch@gmail.com
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